Landlords and tenants should be wary of the level of ground rent charged in a residential lease as it may change the nature of the tenancy, even though it may have been granted for a long term at a premium.
For tenancies granted on or after 1 April 1990, where the tenant is an individual (rather than a company) who occupies it as a their only or principal home, where the ground rent is over £250 (or £1,000 in Greater London) per annum then, unless it comes within an exception, the lease will fall within the definition of a tenancy under the Housing Act 1988 (“the Act”) and will be classed as an assured shorthold tenancy (‘AST’). This can also happen if, over a period of time, the ground rent increases to a sum more than the threshold amount.
If a tenancy is an AST, then any attempt to terminate the lease mid-term must comply with the provisions of s.8 of the Act, with service of a notice specifying one of the grounds under the Act. The usual rules of forfeiture will not apply, the landlord will not have to serve a s.146 notice for non-rent related breaches, and the tenant will not be able to apply for relief from forfeiture. However the landlord would still have to obtain a possession order from the Court. But the forfeiture clause would have to set out the grounds from the Act in such a way that allowed service of a s.8 notice, meaning the landlord might not be able to take any such action.
This could leave the landlord in a difficult situation when it comes to enforcing the covenant by way of early termination, which is often the only useful mid-term remedy.
So when considering action in relation to a residential lease it is worth checking the current ground rent to see if the lease has inadvertently become an AST, and the implications this will have on enforcement. One way of avoiding the problem might be to vary the lease to reduce the ground rent, although this requires the tenant’s cooperation.